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June 24, 2006

Words are cheap, it is deeds that count. Even while the CPI and the CPM weakly “protest” at the foreign policy of the UPA, the fact remains that both have joined with Sonia Gandhi.

Is it any wonder that official America is in love with Sonia Gandhi and her chosen instrument, Manmohan Singh? Both have ensured—with the full backing of the CPM and the CPI—that the Government of India is today effectively directed by junior officials in this city, the same way as Iraq and Afghanistan are. Wherever one goes in Washington, whomever one meets who is in the policy establishment, the joy at getting a team in India that 100 per cent listens to US advice is visible.The hope here is that the BJP and the rest of the NDA will continue to wallow in their present confusion, so that the Sonia-Manmohan team can continue for a full 5-year term. It is a wish shared by Pervez Musharraf as well, who is looking forward to an Indian withdrawal from Siachen and Sir Creek, and the creation of soft borders in Kashmir that would undo the damage done to the jehadi caused by the expensively-built barrier across the Line of Control

It needs to be admitted that the slippage in national security that is being witnessed today began during the time of the NDA government. This columnist has consistently pointed out the numerous missteps made by the NDA, beginning with the Kargil intrusions, caused because those at the top refused to believe that the jehadi army of Pakistan would behave dishonourably, despite five decades of evidence to the contrary.

If Sonia Gandhi is confident about continuing in her Mission Surrender to Foreign Interests, it is because the NDA shows no signs of having learnt from the mistakes of the past, but is instead continuing with the same attitudes that led to the 1998 rout. Hopefully, the situation will change before it is too late for a country already watching a complete loss of influence in its own neighbourhood and the fusing of Maoist insurgency to jehadi.

To add a dash of comic relief to developing tragedy, Sonia Gandhi has made the UPA formally propose UN Under-Secretary Shashi Tharoor as the next Secretary-General. This selection goes against several conventions, including one that requires a UN head to have had ministerial-level experience in his own country. While Kofi Annan was Foreign Minister of Ghana twice, Shashi Tharoor has spent his working life within the UN headquarters. Another convention is that the candidate belong to a smaller, less controversial country. India is neither. A third is the reality that the obvious infirmities in the way the UN is being operated presently mandate an outsider rather than an individual who has not merely contributed to a dysfunctional system, but has been among its principal beneficiaries. Of course, for Tharoor himself, this move by India is welcome, as he can now leave the organisation on a high note, with his pension intact.

Why Tharoor? Friends within the UPA say that this was Sonia’s way of snubblng Manmohan Singh, who—informed groups claim—himself had an eye on Annan’s job. The PM needs to be pushed into his lowly place every now and again, and Sonia misses few opportunities to do so. But the principal reason for the UPA supremo’s diktat is less the impulse to further debase Manmohan Singh than the mindset found in a book that is now on the bookstands. The author is Tharoor himself, and the revealing title is “Nehru: The Invention of India”. According to Shashi Tharoor, India has become what it is not because of its people or even individuals such as Tagore, Gandhi and Patel, but owing to the superhuman qualities of a single colossus, Jawaharlal Nehru. If the book is to be believed,it is Nehru and his family—stretching down to Sonia, of course—who almost singlehandedly made the country a functioning democracy. Small wonder that Sonia Gandhi has decided that this unbiased and scientific mind is precisely the one needed to preside over the UN. Who knows, the next Tharoor book may be “Sonia: The Invention of Humanity”. Just as in the past, it was buddies of Brajesh Mishra who were pitchforked into key positions, these days it is boosters of the Nehru family. It will not be long before another flatterer of the Nehrus, Sunil Khilnani, becomes the next Indian Ambassador to the US, replacing Ronen Sen, who no doubt will be taken care of elsewhere

Words are cheap, it is deeds that count. Even while the CPI and the CPM weakly “protest” at the foreign policy of the UPA, the fact remains that both have joined with Sonia Gandhi. Just whom is the CPI and the CPM fooling when they claim to be “against US hegemony” but are responsible for keeping in office the very UPA that has demonstrated unprecedented loyalty to Washington. These days, Manmohan Singh avoids the all-important Shanghai Cooperation Organisation summit because his boss is nervous that attendance by an Indian Prime Minister at a summit where Iranian President Ahmedinejad is present would prompt US envoy David Mulford to remember yet more Swiss bank account numbers. Of course, times have changed, and the new haven for the proceeds of the enormous deals now being done by the Energy, Defense and other ministries is in Hong Kong, not that our Finance Minister, Palaniappan Chidambaram, would dare be interested, even though it is common knowledge in international financial circles

Army sources say that there is daily pressure from Manmohan Singh to arrange a speedy withdrawal from Siachen, while naval officers speak of the same prime ministerial desire to get India to concede the very territory in Sir Creek that Ayub Khan went to war over in 1965. As for scientists in the Department of Atomic Energy, they are a demoralized lot these days, aware that it will not be long before the Sonia-Manmohan duo install “IAEA” inspectors in almost all the installations needed to ensure success in the crucial thorium conversion programme, as well as in the production of missiles that can protect the billion-plus people of India. Singh, of course, will not have a problem, he can live with one of his daughters in New York, enjoying his dollar pension, and neither will Sonia, who can very quickly get her Italian citizenship back (in case she ever lost it)

This columnist has been a backer of a strong India-US alliance since 1995, but this is one that needs to be on the basis of Washington acknowledging that India has the same rights and status as London and Paris, not that now endured by Kabul and Baghdad, the abyss into which Sonia-Manmohan are pushing this country into. Washington is smirking at how a country of a billion people has been reduced to the status of what Mao Zedong used to term a “running dog”. Prakash Karat and A.B. Bardhan need not, of course, worry, for being atheists, they will not have to answer for their support to such a regime in the hereafter. However, in the interests of intellectual, it would be best for them to admit that they have joined Sonia-Manmohan in celebrating the new status of India, as the third leg in the Kabul-Baghdad-New Delhi neo-colonies. To support the UPA in the Lok Sabha and then pretend they are opposed to its core policy is to underestimate the intelligence of the voters of India, who are waiting for the chance to settle scores with the Sultans and Sultanas of Surrender.

Recent economic forecasts point to the emergence of new energy players on the global scene. Russia, though never fading completely from the world scene, is coming back with a new marketing brand as an energy supplier. Venezuela is catching world attention by its open defiance of the United States. The Central Asian states of Kazakhstan and Turkmenistan, and the Caspian littoral republic of Azerbaijan, have become key to energy diversity long sought by the West. Iran, too, can openly threaten the West and affect world energy and futures markets by using energy as a geopolitical weapon. In and of itself, these trends are nothing new -- OPEC used oil as a successful geopolitical tool in the 1970s, profoundly affecting the global economy. Today's major investment trends and calculations point to the accumulation of vast capital earned from oil sales in states that lack the developed, diversified economies of countries dependent on oil.

Notwithstanding its growing oil revenues, Russia has not yet recovered economically from the near-absolute destruction of its economy in the 1990s; Saudi Arabia is only now trying to diversify its oil-dependent economy; and Venezuelan leader Hugo Chavez is using his oil money to buy influence in South America and weapons from around the world. Nigeria, another major oil supplier, has a mismanaged economy that generates poverty and internal dissent, threatening the very source of its earnings. The positive exceptions, at least for now, seem to be new oil "barons" Azerbaijan and Kazakhstan, whose diversified economies are managing the major influx of hard currency. Time will tell, however, if such management can lead to overall economic growth and not to a short-lived spike in earnings.

What is not clear, however, is the very fate of the countries that seem to be riding high on the ever-increasing wave of oil and gas demand. Current trends in major industrialized states point to the steady emergence of alternative energy technologies such as coal, hydrogen, solar power, ethanol and nuclear energy. At the same time, as the demands for oil and natural gas are hitting new highs, the United States, Western Europe, India, China and Japan are investing major financial and political capital into developing alternatives to paying higher prices at the pump. At this point, the situation is reaching a make or break point: China's hyper-growth can be sustained if energy prices do not get out of control. The same trends are observed in the United States and India. If the U.S. energy market, the largest in the world, is indeed a barometer for world trends and directions, then major energy exporters have about 10-15 years in which they should make major economic transformations.

Currently, the U.S. Congress is grappling with a host of energy issues -- energy will be a major deciding factor during fall's elections in the United States, possibly altering the shape of both the House and the Senate and having a potential impact on domestic and foreign policy. Major resolutions have been introduced that ask for investment in ethanol fuel and massive research and development funding for hydrogen and fuel cell technologies. These resolutions have highlighted the importance of domestic oil reserves as well as technologies like solar and wind energy. Unlike the 1970s and 1980s, when similar trends were visible in the U.S. economy, these initiatives will not fade away with the inflow of more cheap oil. With China and India demanding more oil, no cheap "black gold" remains anymore to once again flood the markets and remove the "threat" of alternative energy.

Today, this is a major election issue and constituents and politicians will continue to demand greater resources for these energy trends. A certain period of time will be necessary to introduce and incorporate these technologies, and then there will be an irreversible trend of lowering oil and gas prices and revenues. Major Gulf exporters such as Saudi Arabia are not prepared for the impending collapse in energy prices, and neither is Iran, Nigeria, Venezuela or Russia.

A major economic precedent exists in the United States that can help predict the impact of changes in energy markets. After the oil shocks of the 1970s, Japanese carmakers won a greater share of the most lucrative automotive market in the world. By making smaller vehicles that did not use much fuel compared to their American competitors, companies like Toyota and Honda forever changed the face of the global automobile market. Today, Toyota is steadily gaining on the largest carmaker in the world, General Motors. Were it not for the energy crises of 1973 and 1979, it is doubtful that Japanese carmakers would have been able to claim such success in the United States.

Today's worries over energy supply and demand is heralding the use of new energy sources to fuel the largest economy in the world. These technologies will have just as a profound effect on world energy markets as smaller, more compact Toyota and Honda sedans had on U.S. consumer trends. While global demand for oil and gas is hitting a new high, the reverse trend is not far off. This trend will have a shocking effect on energy exporters if they do not adequately prepare their economies for the impending changes.

The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. This report may not be reproduced, reprinted or broadcast without the written permission of inquiries@pinr.com. All comments should be directed to content@pinr.com.

June 21, 2006

The National Security Strategy of the United States (NSS) released in March states, "The United States will welcome the emergence of a China that is peaceful and prosperous and that cooperates with us to address common challenges and mutual interests." President George W. Bush used the same phrase when meeting with Chinese President Hu Jintao on April 20, adding that the two countries are "connected through a global economy that has created opportunity for both our peoples." In doing so, President Bush seemed to juxtapose economic cooperation with security concerns, a priority also mentioned in the NSS, which states, "Our strategy seeks to encourage China to make the right strategic choices for its people, while we hedge against other possibilities." These statements provided the impression of a unified concept animating U.S. policy. Events this spring, however, revealed the rivalry within the Bush administration between a "business wing" that favors increased trade and investment ties with China, and a "defense wing" that is very concerned that the capital and technology flowing to China is creating a dangerous rival with global ambitions.

The Office of the Secretary of Defense issued its annual report on the Military Power of the People's Republic of China on May 23. The first paragraph of the executive summary contained familiar phraseology: "U.S. policy encourages China to participate as a responsible international stakeholder by taking on a greater share of responsibility for the health and success of the global system from which China has derived great benefit." Interestingly, the "stakeholder" term did not appear elsewhere in the text of the Pentagon report; its sole appearance in the summary suggests that it was likely inserted during the interagency review process. The term was formulated by former Deputy Secretary of State Robert Zoellick in a speech to the National Committee on U.S.-China Relations last September. He contrasted the "stakeholder" concept and the "tightly woven" global economy to the Cold War and "the distant balance-of-power politics of 19th Century Europe," which he said no longer applied in the 21st century [1].

Yet, balance-of-power considerations are evident in other branches of the administration, including parts of the Department of State. In March, just before leaving for tripartite talks with Australia and Japan, Secretary of State Condoleezza Rice suggested that "those of us who are longstanding allies, have a joint responsibility and obligation to try and produce conditions in which the rise of China will be a positive force in international politics, not a negative force" (The Australian, March 11). In regard to the new agreement with India over civilian nuclear power cooperation, Under Secretary of State Nicholas Burns stated on March 22, "This deal is positive for United States national security interest because it will help us first cement our strategic partnership with India, which is very important for our global interests." The most important global security interests served by closer U.S. ties to both traditional allies and to India is the balancing of China's rising power in Asia.

The Pentagon's Military Power report challenges the arguments of the "business wing" that U.S.-China relations are primarily a function of "win-win" economic integration. China's military buildup supports a foreign policy at odds with the security interests of the United States on many fronts. This is summed up nicely on page 9 of the report: "China continues to dispute sovereignty claims in the South and East China Seas and is preparing for potential conflict over Taiwan. Chinese companies continue to play a negative role in the proliferation of advanced military capabilities, and continue to supply countries such as Iran with critical military technologies. Beijing has refused to join the Proliferation Security Initiative. China has not fully leveraged its close ties with Pyongyang to stem North Korean nuclear ambitions, and continues to maintain or strengthen political, economic and military ties with Iran, Sudan, Burma, Zimbabwe, Cuba and Venezuela, undercutting international efforts to influence those states."

The report continues by discussing the roles that businesses and economic growth have played in Beijing's rise to world power, noting, "The extraordinary economic success of the PRC is a central factor in its emergence as a regional and global power, and is the basis for China's increasingly capable military. The Party has also relied on the successful transformation of the economy as a primary source of legitimacy." This last sentence questions the claims of those who have argued that prosperity will promote liberalism and tame the Communist Party.

Rather than shifting toward political liberalization, states the report, Beijing has utilized foreign companies to build its strength: "Most of China's defense industries rely on foreign procurement and development. The exceptions are few, e.g., ballistic missiles and some space and aviation programs." The report continues, "Foreign investment in physical plants, management, technical and marketing expertise in some basic manufacturing sectors, such as strategic metals and electronics, has increased the prospect for spin-off with military and dual-use industries." Quoting Hu Jintao himself, the report documents China's strategy to "build an innovative system of defense science and technology...to create a good structure under which military and civilian high technologies are shared and mutually transferable."

To prevent Beijing from exploiting U.S. technology successfully to modernize its military, last year the Bush administration proposed new export controls to limit the transfer of "dual-use" technology that could be used to strengthen Chinese capabilities. Certain items would be prohibited, while special licenses would be needed for other products. In addition, there would be more stringent background checks and oversight of transactions. While the international business community has publicly stated its commitment to bolstering national security, its actual behavior has been to oppose any new barriers to trade or investment. As the U.S. Chamber of Commerce admits in its 2005-2006 Policy Priorities, it seeks to "contain the proliferation of counterproductive sanctions against incoming foreign investment, as well as new restrictions on U.S. exports, that may be miscast as homeland security or national security imperatives" [2].

While China has protested U.S. export controls, and President Hu raised the issue at the April summit, former U.S. Ambassador to Beijing James Sasser has pointed out that "The Chinese really don't do any lobbying." Instead, Sasser argues, "The heavy lifting is done by the American business community" (Bloomberg, December 9, 2003). The computer, aerospace and machinery industries have all lobbied the Commerce Department for less restrictive rules and a shorter list of controlled products. Among the items that were taken off the export control list were aircraft engines, ball bearings, machine tools and virtual-reality systems (Bloomberg, May 3). These new regulations were drafted in May and are currently being circulated through the interagency review process. Given these realities, it seems that the original concerns for national security have been lost. Acknowledging that the current draft restricts only approximately 40 items as opposed to the hundreds of items listed in earlier proposals, Under Secretary of Commerce for Industry and Security David McCormick told the Wall Street Journal, "The policy I've described is a very different approach than was being discussed just six months ago. There are some philosophical shifts here" (Wall Street Journal, May 23).

A report by the Government Accountability Office (GAO) disclosed that "the current export control system has not effectively slowed China's ability to obtain billions of dollars worth of advanced semiconductor equipment as part of its national strategy to modernize its semiconductor industry" (GAO, September 2005). The GAO found that licenses were routinely approved with inadequate, if any, follow up inspections by U.S. officials to verify promises by China's Commerce Ministry that items would not be used for military purposes.

In China, President Hu's system is already in place. In The Outline of the Development Program of Science and Technology for National Defense for 2006 to 2020, the Chinese government readily admits to their intent to share technology between military and civilian institutions and businesses (Xinhua, May 25). Furthermore, one-third of the economy is still in the hands of the government and much of the private sector is run by elites with direct ties to the Chinese Communist Party. Foreign firms are locked into joint ventures with Chinese partners [3]. The Commerce Department's notion of a large "legitimate" commercial sector to which technology can be safely sold seems mistaken. As the Pentagon's report declares, "China continues a systematic effort to obtain dual-use technologies through trade, commercial transactions and joint ventures, particularly in the areas of software and integrated circuits industries that are vital for information-based, network-centric warfare." A recent study by the RAND Corporation corroborates the Pentagon's suspicions over joint ventures and other commercial technology transfers aiding the Chinese military. The study stated that although not officially classified as part of the weapons industry, Beijing's IT establishment "is probably the most organizationally innovative and economically dynamic producer of equipment for China's military" [4].

In a separate report, the GAO also found that the Committee on Foreign Investment in the United States (CFIUS), the institution responsible for policing foreign acquisitions of U.S. assets that have security implications, has a "reluctance to initiate an investigation due in part to concerns about potential negative effects on the U.S. open investment policy" (GAO, September 2005). Last year, China's state-owned China National Offshore Oil Company (CNOOC) attempted to purchase the American-owned Unocal oil company, setting off a furor in Congress over whether CFIUS would sign off on the acquisition. The House of Representatives intervened in the process and passed a resolution that deterred the deal. The incident also spurred Senate action to strengthen the CFIUS process, as Beijing's enormous dollar reserves allow it to make strong bids for any number of U.S. firms. It is doubtful that CFIUS's performance will improve substantially, however, as the proposed "Foreign Investment and National Security Act of 2006" still leaves Treasury as the CFIUS chair, something strongly favored by corporate lobbyists (The Hill, October 18, 2005).

The recent appointment of Henry Paulson as secretary of the treasury could compound the problem. Paulson, the CEO of Goldman Sachs, led his firm in representing several of China's state-owned firms as well as the Beijing regime itself. Indeed, Goldman Sachs was involved in financing the aborted CNOOC-Unocal deal. Paulson will be a powerful new addition to the "business wing" of the Bush administration.

While its own policy has become more assertive, Beijing has capitalized upon the competing worldviews and interest group coalitions to play the two wings against one another and to prevent the formulation of a resolute U.S. policy. When a Chinese interceptor collided with a U.S. Navy EP-3 reconnaissance plane over international waters in April 2001, the Chamber of Commerce was in the middle of its own private diplomacy project, "A National Conversation with the Chinese Ambassador," a 10-city tour for Beijing's ambassador to the United States, Yang Jiechi. The tour's planned stop in Chicago on April 25 continued, giving Beijing another forum to explain its side of the dispute. After the crisis was resolved, the Chamber's president, Thomas Donahue, revealed his ranking of the issues, declaring, "We must strive to see the day when an occurrence like the spy plane incident last spring doesn't unravel our entire relationship" [5].

On his trip to the United States this April, President Hu did not get a state dinner at the White House. He did, however, have two lavish dinners held in his honor by the business community, first in Seattle before the summit, and then in Washington DC after the summit. The Chinese Foreign Ministry referred to the Washington dinner as an event hosted by "12 friendly organizations" led by the Chamber of Commerce and the U.S.-China Business Council (USCBC). As USCBC President John Frisbie remarked afterwards, "The high turnout for the dinner demonstrates the strength of support for advancing U.S.-China relations through engagement" [6].

Strategist Sun Tzu might see this situation and the opportunities it presented differently. As he advised, when making plans against an opponent, "if his men are harmonious, split them."

Notes

1. Robert B. Zoellick, "Whither China: From Membership to Responsibility?" Remarks to National Committee on U.S.-China Relations, New York City, September 21, 2005. 2. U.S. Chamber of Commerce, International Trade and Investment Priorities for 2005-2006. 3. For a study of how family, clan and cultural norms reinforce formal organization in the of spread technology across sectors in China see: George T. Haley, Usha C. V. Haley and Chin Tiong Tan, The Chinese Tao of Business: The Logic of Successful Business Strategy (John Wiley and Sons, 2004). 4. Evan Medeiros, Roger Cliff, Keith Crane and James Mulvenon, A New Direction for China's Defense Industry, (RAND Corporation, December, 2005), p. viii. 5. Statement by Thomas Donahue, July 2001. 6. Press Release, U.S.-China Business Council, April 20, 2006.

With continuous economic growth averaging an astonishing annual rate of 10 percent over the past quarter century, China has transformed its landscape, become one of the largest economic powerhouses on earth, created development opportunities for its trading partners around the world and, in the process, generated huge demands for new sources of energy and other resources. Africa, on the other hand, has been left behind in the global quest for industrial modernization, economic prosperity and political stability. Yet, into Africa the Chinese are coming. They are coming for trade, investment and joint ventures, and they are consuming all the energy, minerals and other raw materials that the continent can offer.

An Evolution of Traditional Sino-African Ties

Africa's importance to China is reflected by Chinese Premier Wen Jiabao's ongoing tour of Africa. According to China's Ministry of Commerce, the seven countries on his itinerary—Egypt, Ghana, the Republic of Congo, Angola, South Africa, Tanzania and Uganda—have a combined trade volume of over US$20 billion with China, or 50.6 percent of total China-Africa trade last year. Only two months earlier, Chinese President Hu Jintao visited three other African states—Morocco, Nigeria and Kenya—following his trip to the United States and Saudi Arabia.

Such high-profile visits, a recurring practice over the past few years, have aroused speculation that Beijing's pursuit of great power status may include a new grand strategy regarding Africa. After all, top Chinese leaders have done the same extensive tours to Latin American countries since late 2004 when President Hu first visited Brazil, Argentina, Chile and Cuba. China's ties with African countries, however, can be traced back to the 1950s when newly emerging African states declared their independence. From the 1950s to 1970s, China developed close relations with many of these countries based primarily on shared ideological belief and political identity: anti-colonialism, national independence, economic self-reliance and Third World cooperation. Beijing provided substantial aid and other assistance to struggling African states in order to demonstrate that China was on the side of the Third World.

Things changed in the late 1970s. China's economic reforms gradually moved China away from its radical revolutionary worldview of the past. Beijing's open-door policy, primarily designed to attract foreign trade, investment and joint-venture opportunities from Western countries and to facilitate China's entry into the World Trade Organization, moved China much closer to a market economy where profits, not political agendas, drove most of the economic and trade activities. In this process, China's relations with African and other Third World countries have also evolved from anti-colonial brothers-in-arms to economic and trade partners based on market principles. Yet, many things have remained the same. Beijing continues to pay and train young African diplomats in the Chinese Foreign Ministry's prestigious Foreign Affairs University, a practice that has continued for many years; China continues to present itself as a member of the Third World; and since 1991, every Chinese foreign minister's first visit abroad each year has been to an African country. Beijing has even named 2006 the "Year of Africa," and it is getting ready to host a Sino-African summit toward the end of this year. Furthermore, according to Beijing's report to the People's Congress, most of China's foreign aid—totaling 7.5 billion yuan ($950 million) last year—has gone to more than 50 African countries. In fact, Wen claimed that China has offered Africa more than $44 billion in aid over the past 50 years to finance 900 infrastructure projects (AP, June 18). Meanwhile, all signs indicate that China-African relations are entering a new phase centered on energy and raw materials.

The New Focus on Energy

China's relentless pursuit of economic development turned the country into a net petroleum importer in 1993, and by the turn of the new century, its dependency on foreign oil had jumped to about 40 percent of its demand. Beijing's new target is to quadruple its economy again by 2020, as it did from the late 1970s to the mid-1990s. To achieve this goal, however, China must rely even more on external energy supplies as the Middle Kingdom already burns through 6.3 million barrels of oil a day. Although still far behind the United States, which consumes some 20 million barrels a day, the International Energy Bureau projects that Chinese consumption will reach a daily level of 10 million barrels within the next two decades or so.

Thus, China's quest for energy and other resources has brought China to Africa with urgency. Chinese customs statistics reveal that from 2001 to 2005, China's trade with Africa increased 268 percent, slower only than the growth of China's trade with the Middle East in the same period (367 percent), but faster than China's trade growth with Latin America (238 percent), ASEAN (170 percent), European Union (184 percent) and North America (163 percent). In the first quarter of 2006, the Ministry of Commerce reported that China's trade with the seven countries on Premier Wen's current African touring list amounted to $6.56 billion dollars, a surge of 168.2 percent. It is not surprising, therefore, that in such a broad economic context, Africa has turned into a major energy supplier to China in recent years. Back in 2003, both President Hu and Premier Wen visited several oil-producing African states with Chinese energy company executives, and since then China has become involved in an increasing number of energy deals on the continent that bear a number of unique characteristics.

Energy Security with Chinese Characteristics

First, Beijing is willing to get into the "troubled zones" with bold investment and aid packages in exchange for energy. When Angola ended its 27-year civil war in 2002, few foreign countries and firms were willing to invest in the country. China, on the other hand, committed a $3 billion oil-backed credit line to rebuild the country's shattered infrastructure. Beijing also made Angola its largest foreign aid destination. Now, Angola is the second largest oil producer after Nigeria in sub-Saharan Africa, producing 1.4 million barrels per day with one-third of its oil exports—13 percent of total Chinese imports—going to China. In the first four months of this year, Angola was also the largest supplier of crude to the Chinese market after Saudi Arabia (AFP, June 20). Similar arrangements have been made with Nigeria and other countries as well.

Second, Chinese energy companies are committing large amounts of funding and labor for exploration and development rights in resource-rich countries. Sudan is one of the earliest and largest overseas energy projects by China's major energy companies. Chinese operations in Sudan include investment, development, pipeline building and a large number of Chinese labor deployments. Today, China has $4 billion of investment in the country. The China National Petroleum Corp. (CNPC) has a 40 percent controlling stake in Greater Nile Petroleum that dominates Sudan's oilfields. Last year, China purchased more than half of Sudan's oil exports, and earlier this year, China National Offshore Oil Corp. (CNOOC) announced that it had bought a 45 percent stake in a Nigerian oil-and-gas field for $2.27 billion and also purchased 35 percent of an exploration license in the Niger Delta for $60 million. Chinese companies have made similar investments in Angola and other countries.

Third, Chinese energy companies enter into joint-ventures with national governments, state-controlled energy companies or individual enterprises in order to establish a long-term local presence. It appears that the Chinese companies are often willing to outbid their competitors in major contracts awarded by African governments because their concerns are not in short-term returns but rather in strategic positioning for the future.

Fourth, China does not take into consideration the particular concerns of the United States or other Western countries when selecting energy cooperation partners and has a different set of standards on how to advance political reform and human rights in Africa. Most notoriously, China has been willing to engage in energy deals with the Sudanese government despite the ongoing crisis in Darfur. Likewise, China has just reached an energy and mining deal worth $1.3 billion with Zimbabwe. In exchange for building three coal-fired thermal power stations, Zimbabwe is likely to repay the Chinese investment with its rich deposits of platinum, gold, coal nickel and diamonds (The Guardian, June 16).

A Model for Future Cooperation or a Return to the Past?

In the past few years, the demands from China and other developing economies for oil and natural gas have become the major factor, although not the only one, that has driven up world energy prices. Chinese energy companies' extensive activities in Africa, Latin America, the Middle East and Central Asia in search of oil and gas assets have created anxiety regarding the world's future supply of energy. Discussions of a new "great game"—a term traditionally associated with competition among major world powers for the control of Eurasian oil resources since the late nineteenth century—have become frequent among observers of energy security.

Today, Africa supplies China with nearly a third of its oil imports. Beijing's extensive engagement and its ascending status in Africa also raises important questions on the nature of China's involvement in the continent as well as Beijing's long-term objectives in the region. Critics charge that China has pursued mercantilist policies in the region for pure economic benefits without human rights or environmental concerns. Due to China's support, they argue, the Sudanese government has been able to continue its genocidal policy in the Darfur region, and the Mugabe regime has been able to survive and carry on its abuses of human rights in Zimbabwe.

Officially, Beijing rejects the criticism with two arguments. The first is China's trademark policy of non-interference in domestic affairs. As Premier Wen stated, "We believe that people in different regions and countries, including those in Africa, have their right and ability to handle their own issues" (South China Morning Post, June 19). The second is China's emphasis that its involvement in Africa is different from the colonialism of the past, and that an affluent China is now putting money back into the local African economy. As Chinese leaders like to say, it is a win-win situation.

With China speedily expanding its activities in Africa, international concerns over Chinese behavior are also deepening and calls for Beijing to be a more responsible world power are becoming stronger. There are also indications that Chinese policy makers, academics, NGOs and even enterprises are beginning to reflect upon China's role in Africa. Many African countries are benefiting from a "China boom," but they would be better served if Beijing were to take further steps in balancing between economic interests and the welfare of the African people. Only by doing so would China be able to demonstrate to the world that its arrival in Africa is indeed different from the old colonial powers.

Note: Special thanks to Taikun Ji and Simin Yu of the China Institute at the University of Alberta for data collection.

It is an established fact among U.S. officials: the Shanghai Cooperation Organization (SCO) is China's primary multilateral instrument to implement its openly anti-U.S. policy in Central Asia. The recently concluded fifth anniversary summit of the SCO in Shanghai confirmed its anti-U.S. proclivities. The SCO's communiqué reiterated its opposition to the "interference in other countries' internal affairs," a common euphemism used to describe Washington's calls for increased democratization in Central Asia. "Models of social development should not be 'exported,'" the joint declaration stated, implicitly reflecting the assessment by Moscow and Beijing that U.S. non-governmental organizations were behind the opposition movements and the "color revolutions" in Central Asia (People's Daily, June 15). In addition to its ideological inclinations, however, the summit also revealed interesting dynamics within the organization as well as Zhongnanhai's policy dilemmas in dealing with Central Asia.

Fear of Strategic Encirclement

Among the reasons behind China's antagonism toward the U.S. presence in Central Asia are strategic concerns; U.S. military bases in the region provide Washington with a potential source for strategic encirclement. Thus, while Chinese President Hu Jintao proclaims that the SCO is a non-aligned organization not directed at any third party, he is not only dissembling but also hinting at one of its key purposes from China's perspective (Asia Times, June 16). There is little doubt that the SCO is intended to provide a platform for China's comprehensive engagement with Central Asia and to serve as a mechanism for ousting the U.S. presence in the region. Indeed, in 2005, Russian sources candidly revealed that Beijing seeks to replace Washington in both Uzbekistan and Kyrgyzstan, a move not favored by Moscow (Nezavisimaya Gazeta, August 8, 2005).

The Chinese campaign against the U.S. presence in Central Asia also suggests that statements to the effect for a common Sino-American opposition to Islamic terrorism must be greatly qualified. Beijing's attempts to oust Washington from its bases in Uzbekistan and Kyrgyzstan at a time of heightened insurgency by the Taliban hardly squares with such a common interest. Chinese spokesman Liu Jianchao said that anti-terrorism should not become a basis for "double standards," i.e. U.S. leadership in the war (China Daily, June 15). It is likely that only the Taliban's resurgence and its recent "inconvenient" decision to attack in force prevented Kyrgyzstan from submitting to Sino-Russian pressure to force Washington out of its base at Manas—a move that was widely expected to occur at the SCO summit.

Sino-Russian Rivalry

Another policy dilemma for the SCO is the question of its future role. China and Russia have both stated their desire for the organization to serve as a regional provider of security through intelligence and economic cooperation. Yet, this declared commonality belies certain visible and potentially significant differences between Beijing and Moscow (Asia Times, June 16). Both countries are energy rivals in Central Asia, with Russia striving to monopolize Central Asian exports, a stance that, by definition, constrains China's ability to deal bilaterally with these states. China is also engaged in massive infrastructural projects of rail and road transportation with these states, positioning itself as a trade rival to Russia. Thus, both Moscow and Beijing use the SCO as a façade, behind which they compete for bilateral deals with member states. In this respect, China has done so quite brilliantly, making deals with Kyrgyzstan, Uzbekistan and Tajikistan, as well as with neutral Turkmenistan. Beijing has offered credits to Dushanbe and is discussing funding for a highway through Tajikistan; it has financed the construction of a cement factory in Kyrgyzstan; and it has discussed the construction of a gas pipeline to connect Turkmenistan and Uzbekistan to China, as well as the construction of a projected Kazakhstan-China gas pipeline to go along with the existing oil pipeline between the two countries (Asia Times, June 16).

As opposed to its earlier view that the SCO was primarily a Chinese initiative, China's political and economic inroads has forced Russia to reconsider the multilateral organ as one in which it must vigorously take part. President Putin has suggested that the SCO become a starting point for networking with other Asian security organizations to provide a basis for Russia's enhanced standing in Asia. Beijing's stance, on the other hand, has been that the structure for multilateral cooperation embodied in the SCO is a template for a new and alternative system of relations in Asia and the world. In other words, the SCO is actually the embryonic framework of an anti-U.S. system in Asia in which China plays a major role and leverages its new pro-multilateralist policy as a means of influencing these organizations in a favorable direction.

Nascent Military Alliance?

Both Russia and China have maintained that the SCO is not a military alliance and is not the equivalent of NATO. The evidence to date, however, points in an ambivalent direction (RIA Novosti, June 6). To begin with, the original charter of the SCO is a classic collective security document, mandating that each member come to the aid of any of the other members that requests help from an attack by terrorists, separatists or extremists. In addition, both China and Russia have sought military bases in Central Asia, and it is safe to assume that should new opportunities arise, both countries will do so again. Finally, since 2001, China and Russia have conducted a growing number of exercises either with Central Asian states or with one another, under the auspices of the SCO. If the SCO is indeed a non-military organization, why was there a need for such exercises and what was their ultimate purpose? It is worth noting that nearly every commentary on the Sino-Russian Peace Mission 2005 noted that the exercises were undoubtedly anti-U.S. and directed at U.S. policy in Central Asia, Taiwan or even the Korean Peninsula (China Brief, September 27, 2005).

An Ambiguous Future for the SCO

Although the SCO seems to have temporarily fixated upon an identity as a regional multilateral platform for cooperation, its destiny and purpose remain undefined. It is unclear if the SCO will remain a political and economic association or transform into a true provider of hard security. This point pertains particularly to the question of its future membership. Both Iran and Pakistan have appealed for membership with the SCO, although it is highly doubtful that either will be accepted. The current delicate situation of the P5+1 Talks over Iran's uranium enrichment program almost guarantees a preclusion of Tehran from receiving membership, and despite China's support of Pakistan's observer status in the SCO, the volatile landscape in South Asia makes Pakistani membership just as unlikely. Admittance of Pakistan would also force the existing members to consider India for membership, something highly favored by Russia. Given the security obligation among SCO members, no country would wish to be tied to Iran or either of the South Asian countries. Furthermore, despite Beijing's détente with New Delhi, it is certainly not eager to see India interfere in what China views as its sphere of influence. After all, China is busy trying to expand its ties to Iran and Pakistan as well as Central Asia in both energy and strategic affairs, e.g. help for constructing the port at Gwadar, and its strategic aims are still tied to supporting Pakistan in order to confine India to the subcontinent.

Likewise, if the SCO is to be a forum for trade and economic security and cooperation, then the competing energy policies of Russia and China will have to be adjusted. Although they should be complementary in principle, in reality China and Russia are rivals for energy, especially in Central Asia. Russia's political system would not be able to survive without monopolizing Central Asian energy, and China demands independent access to energy without excessively depending upon on any one power. Russian and Chinese behaviors also demonstrate a preference for bilateral deals with Central Asian states where they can monopolize their power vis-à-vis those governments. This continuing bilateralism unquestionably erodes the foundations of the SCO framework and introduces increased competitiveness into regional diplomacy.

Although the SCO has built structures for cooperation and has achieved a certain level of influence, it has by no means established itself as a successful security provider. Russia's preference for the Collective Security Treaty Organization as a vehicle for providing military security and economic cooperation among the member states (excluding China) bears the sign of an incipient Sino-Russian rivalry. Ultimately, the security of Central Asia cannot be built exclusively or even primarily upon the basis of an anti-democratic or anti-U.S. platform. The SCO will have to confront and adapt to new challenges if it is to remain both relevant and effective. The SCO's importance to Beijing, however, as the first international organization headquartered in China and as its first membership in a collective security project means that one can hardly expect Beijing to allow it to fail to come to grips with its new challenges. Thus, the fifth birthday summit is not only an occasion for self-congratulation and anti-Americanism, but also an occasion for new assessments concerning China's policies toward Central Asia.

June 20, 2006

MUMBAI, June 20: Marking the 40th anniversary of Shiv Sena, its chief Mr Bal Thackeray last night said he was ready to seek cooperation of Naxalites to fight Islamic terrorism in the country. “They (Naxalites) are Hindus. They have some social -economic issues for which they have taken to arms. When separatists are invited for talks in Delhi why do the government ignore Naxalites?” he asked. The Sena chief said the country faced bigger threat from Islamic separatists not only in Jammu and Kashmir but elsewhere in India. He called the rulers “eunuchs” for tolerating terrorism at the cost of national security. Mr Thackeray spoke for 10 minutes but came down heavily on the UPA government taking diktat from Mrs Sonia Gandhi. Explaining Shiv Sena’s stand on the reservation controversy, Mr Thackeray said distinction in jobs and education on caste basis would divide Hindus and would lead to disintegration of the country. He said reservation, if any, should be given only on economic backwardness basis irrespective of the caste, creed or religion of candidates. He criticised all political parties for not spelling out their policy on the issue of reservation. “Most of the parties indulge in double-speak. Confusion is intentional to garner votes of both pro and anti- reservationists, ” he said. The Sena chief exhorted his followers to brace up for elections to Mumbai and Thane municipal corporations due in a few months. Mr Thackeray admitted that age was catching him fast. “With remote control I can manage behaviour of MPs, MLAs and other workers of Shiv Sena but not my age,” the Sena chief said. He, however, did not utter a word about his rebel nephew Mr Raj Thackeray or his political party the Maharashtra Navnirman Sena.

Australia's geopolitical weight in global power relations is increasing. After the Cold War period, when the country was relegated to geostrategic marginality notwithstanding its solid alliance with the U.S.-led Western alliance, Canberra is now emerging as a new protagonist in the security framework of the Asia-Pacific and eastern Indian Ocean regions.

There are two reasons for Australia's growing international importance. First, China's and India's rise as great powers are making Canberra's bi-maritime character more significant in the U.S.-India-China triangle. Washington needs reliable allies since a new Asian multipolar system is taking shape, with Beijing and New Delhi both beefing up their navies.

Second, Australia's role in stabilizing the increasingly problematic Southeast Asian region is becoming vital. With Islamist separatist movements rising in Indonesia, Thailand and the Philippines, regional instability may be seen as a window of opportunity by terror networks -- such as Jemaah Islamiyah (J.I.) or even al-Qaeda -- that seek to establish sanctuaries in the area. Moreover, regional instability may put Australia's immigration policy at peril and ruin advantageous trade relationships. However, Canberra's recent upgrade of its power and influence projection in the region is being lambasted by Indonesia and Malaysia, which refer to it as neo-colonialism aimed at securing energy resources.

Australia's New Global Dimension: Relations with China and the United States

Washington's perception of China's rise as a possible threat to global security affects Australia's place in the new U.S.-China power relationship, encompassing Southeast Asia and Oceania. Of course, Beijing's increasing power and influence does not automatically transform into Chinese expansionism, making such a threat latent for the moment.

Therefore, while Canberra is certainly siding with Washington in building Asian alliances with Japan and South Korea to contain possible Chinese expansionism, it is also engaging Beijing economically; China, for example, is already Australia's third-largest trading partner.

Since the United States considers Australia as a necessary ally to counter the rising military and economic power of Beijing, the Sino-Australian relationship may encounter an obstacle during its development toward full potential. In 2004, Canberra signed in Washington a Memorandum of Understanding that sets Australia's participation in a future U.S.-led anti-ballistic missile defense program. Immediately after the agreement, China warned Australia that such strategic cooperation in missile defense could deteriorate Sino-Australian diplomatic relations.

The main issue is that the United States conceives enhanced defense cooperation with Australia not merely as a tool to reinforce Canberra's regional stabilizing and peacekeeping efforts, but instead as a functional strategic partnership that could ultimately serve Washington's military ends in the case of an escalation over Taiwan between China and the United States. Moreover, Beijing perceives such U.S.-Australian strategic alignment as a segment of a broader U.S.-Japan-South Korea-Australia axis that could potentially encircle China in the maritime region, composing Northeast and Southeast Asia.

When placed in this context, it is clear that Australia's security and economic interests will be best served if Canberra proves able to maintain an autonomous foreign policy, including ever-increasing economic engagement with China. Although the Australian establishment considers a solid defense cooperation with Washington a necessary security guarantee, as the Oceanian country often perceives itself as being encircled by conquering Asian giants (Indonesia and China), Australia's defense policy will likely be accompanied by a diplomatic effort so as to avoid upsetting Beijing's security perceptions, although the participation in future anti-ballistic missile projects is unlikely to be withdrawn.

On the contrary, Australia could be significantly damaged by a U.S.-China escalation over Taiwan, which would involve Canberra's direct or indirect participation and disrupting consequences for trade in the Asia-Pacific, or by a sharp contrast between a U.S.-led alignment and an enhanced Sino-Indonesian axis in Southeast Asia that could lead to a dangerous arms race.

In the short-term, such dangers seem unlikely. However, monitoring the evolution of the Taiwan situation, as well as Sino-Japanese relations, will be on the top of Australia's government agenda. At the same time, India's rise as the Indian Ocean's bigger maritime power will inevitably increase Canberra's attention toward its Western flank. The future of the Indo-Australian strategic relationship will be highly dependent upon the development of New Delhi's alliance with the United States.

Australia's New Regional Dimension: The Indonesian Factor

Undoubtedly, Australia's bilateral relationship with Indonesia has always been crucial. Indonesia's annexation of Dutch West Papua (Irian Jaya, also known as Papua) in 1962 caused the relationship to deteriorate and tension remained until the end of the Cold War. In addition, Jakarta's invasion and occupation of East Timor in 1975 came to aggravate the situation. In 1989, the Timor Gap oil agreement, conceived to manage peacefully the exploitation of the oil and gas deposits in the Arafura Sea, was key in improving bilateral ties, but Australia's military intervention in East Timor in 1999 put an end to the detente.

Indonesia remains Australia's major security concern and regional competitor. This is especially true after the September 11 terrorist attacks pushed Canberra to more decidedly side with the United States in the war on terrorism. Australia's participation in the U.S.-led war against Iraq in 2003 has exposed the country to al-Qaeda threats like never before. Notwithstanding that Australian territory was not directly struck by terrorist attacks, three events have contributed to the increase in the terror threat against Canberra.

First of all, on October 12, 2002, the bombing of the Sari nightclub at Kuta Beach, Bali, attributed to J.I., killed 88 Australian tourists in an event that marked the eruption of al-Qaeda-inspired terror tactics in Southeast Asia. Secondly, on September 9, 2004, the Australian Embassy in Jakarta was also attacked by J.I. Third, in September 2005, a videotape attributed to al-Qaeda mentioned Melbourne as a potential target for fresh attacks as retaliation for Canberra's staunch support of U.S. actions in Iraq.

Indonesia's instability and Islamist-inspired separatism is, therefore, a primary cause of concern for Australia. In 2002 and again in 2004, Australian Prime Minister John Howard suggested that Canberra may have recourse for pre-emptive strikes against terrorist groups established in regional neighbors. Such statements irritated the Indonesian government, as the latter perceived Howard's words as interference in the sovereignty of Southeast Asian countries.

Instability in Asia-Pacific countries has pushed Australia to seek the role of regional stabilizer. This position, however, and especially Canberra's active role in the attempts to end East Timor's instability, have caused Indonesia and Malaysia to sharply criticize their neighbor since the two Asian states suspect that humanitarian intervention is a pretext to increase the political and strategic influence in the Southeast Asian seas, whereby the control of maritime resources (among which oil and natural gas) would be the real reason for such interventionism.

In fact, competition over oil and natural gas reserves in the Southeast Asian seas is largely responsible for Indonesia's irritation over Australia's interventionism in East Timor since both Jakarta and Canberra are interested in exploiting the Timor Sea's resources.

Australia's energy security strategy is currently fostering hot debate in the country. Many observers point out that Australian dependency upon oil imports is dangerously growing, and that the country's still considerable natural gas resources are not sufficiently exploited because of lackadaisical industrial and commercial plans.

Since some estimates, recently mentioned by the Australian environmentalist movement, say that the country's oil imports will increase from 30 percent to 50 percent, some factions think that Australia needs to quickly find alternative energy supplies to lessen its increasing dependency on the Middle East.

Since Australia's security interests need to be harmonized with its economic ones, the country will increasingly need a strategy based on improving its image among the Southeast Asian powers significantly and engaging the latter successfully through enhanced regional economic integration. The perception of Australia as a neo-colonialist state may trigger a dangerous deterioration of Australia's strategic ties with Indonesia, Malaysia, Thailand and the Philippines, and it could push those countries to seek out China in order to counter the U.S.-Australian combine.

The proof of such a potentially dangerous dynamic has been Indonesia's decision in 2005 to announce the start of a missile program in cooperation with China, likely in response to Australia's efforts to augment its power projection capabilities.

Conclusion

Australia is, and will continue to be, a solid U.S. ally for the foreseeable future, independent of what kind of government its citizens choose. However, its "cultural exception" (i.e., being an Anglo-Saxon country in the Southeast Asian geopolitical region), coupled with an ever increasing strategic role in the area, may isolate it from its regional neighbors.

Expect Canberra to continue engaging both China and the Southeast Asian countries economically, and to act diplomatically to reinforce regional strategic ties in order to stabilize East Timor, the Solomon Islands, as well as other potentially explosive regional developments. Since Australia will continue to cooperate with the United States tightly, both against Islamist terror networks and on advanced defense projects, diplomacy will indeed play a vital role in preventing possible tensions.

Australia enjoys high political stability and remains the Asia-Pacific's most competitive economy. As a result, Canberra can take advantage of the region's increasing influence on the global chessboard by becoming a gateway between the Indian and Pacific Oceans and between the West and the rising Asian powers.

Report Drafted By:Dr. Federico Bordonaro

The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. This report may not be reproduced, reprinted or broadcast without the written permission of inquiries@pinr.com. All comments should be directed to content@pinr.com.

The Chinese government is continuing efforts to cope with its runaway economy. The People's Bank of China has raised interest rates. Banks have been told to curb lending. The government has said that it will implement procedures to rein in foreign acquisitions at low prices -- or, in other words, to block fire-sales of Chinese companies. As a recent headline in the Japan Times put it, "China's Monetary Surge Dooms Its Boom."

A lot of things have gone into dooming China's boom, and the money surge is one of the more immediate problems. However, as we have argued (and this article should be read in the context of past analyses), the end of the Chinese boom was inevitable. The issue now is how all of this will play out in China and in the world.

What must be understood is that China now is moving from an economic problem to a socio-political one. The financial problem is a symptom; the fundamental problem is that tremendous irrationality has been built into the Chinese economy. Enterprises that are not economically viable continue to function through infusions of cash. Some of the cash comes from borrowing, some by exporting at economically unsustainable prices. The result is a squandering of resources. The reasons that this continues have nothing to do with economic rationalism and everything to do with political and social reality.

If interest rates were to rise and lending were to become disciplined, many of China's enterprises would fail. This would bring several consequences.

First, and most important, it would result in a massive increase in unemployment. At this point, the irrationality has been going on for years. It is not only state-owned enterprises that are economically unsustainable; many newer enterprises, including those in which Western companies have invested, are not succeeding. When we look at the figures for nonperforming and troubled loans, they amount to nearly half of China's gross domestic product. That represents a lot of irrationality, a lot of financial failures and a lot of unemployment. And unemployment is a political and social problem. The question is whether China politically can afford the economic solution.

Second, lending has become a system for maintaining the political solidarity of China's elite. Loans have been made not only to avoid the problem of unemployment; they also were made as part of political arrangements that allowed the Chinese Communist Party and regional party organizations to avoid conflict and divisions. As long as the pie was growing, everyone could have a piece. But if the pie starts contracting, there will be losers and winners. The question of who will go bankrupt and who will not will become a highly divisive and potentially destabilizing political crisis. Again, the economic solution -- austerity -- and political reality may run counter to each other.

Obviously, China has massive cash reserves. These may not be massive enough to cover the financial crisis, but they are sufficient to allow the government to put off addressing the problem for a while. China also has the ability to promulgate rules and regulations that allow bankrupt entities to continue functioning. However, it always must be remembered that on the other side of a bad loan is a damaged creditor. A loan that can be deferred by fiat is an asset that can no longer be used. When you avoid economic disaster for the debtor, you transfer the pain -- and potentially the disaster -- to the creditor. And since the creditor is normally the economically healthier entity, you postpone the death of the weak by weakening the strong. The more you do this, the worse it becomes. Thus, whether the Chinese use cash reserves to postpone the problem or use regulation to do so, the net result will be buying time at the cost of increased pain.

China's Likely Path

Asia has been here before. Japan encountered this problem around 1990, and East and Southeast Asia encountered it in 1997. Roughly three models for dealing with the problem exist:

Japan model: Use reserves and formal and informal measures to avoid actions that would trigger massive bankruptcies and unemployment. Accept economic stagnation for the better part of a generation.

South Korea model: Move rapidly to restructure the economy, using economic and political means. Control social unrest with security measures. Move out of the problem in a matter of years.

Indonesia model: Lacking resources to manage the crisis, suffer both financial dysfunction and political strife among the elite and between regions.

Japan was able to do what it did because it is a highly disciplined, cohesive society, in which shared pain is viewed as preferable to social dislocation. South Korea was able to do what it did because the magnitude of its crisis was relatively less than Japan's, and because the state had the means for suppressing unhappiness. Indonesia failed to do what it needed to do because it lacked resources and political power.

Other countries have fallen somewhere along this continuum. China will make its own path. However, it should be pointed out that China is not socially similar to either Japan or South Korea. Like Indonesia, China is a diverse and divided nation. The Communist Party lost its moral standing in the 1970s. As with Suharto's government, its legitimacy now derives from the fact that it has created prosperity. When prosperity slows down or stops, the Party cannot fall back on inherent legitimacy, as was the case with the system in Japan. And the wildly diverse levels of economic development make a single, integrated solution, as was used in South Korea, unlikely. The most likely direction for China, therefore, is massive social and political instability.

Now, the Communist Party may lack moral authority, but it does wield tremendous power. The People's Liberation Army and the various security forces are an enormous presence in China. Indeed, the government already is using its security forces aggressively, cracking down on dissent and against at least some business leaders, in anticipation of coming troubles. The ability to suppress unrest is not trivial. Therefore, the most likely path for China in a post-boom environment is to increase suppression and reimpose systematic dictatorship.

This is not an absolute given. There are many in the Party who now are arguing that China has abandoned its Communist principles and its social base. In other words, they want to reach out to the peasants in the interior, who have benefited little from the boom and who resent the prosperity of the coastal regions. The idea is to use these peasants in a process of renationalization -- or, at least, a process in which the free market is dramatically limited and at least some of the wealth is redistributed.

This goal makes little economic sense, but what China needs economically is unsupportable socially and politically. Imposing a crushing austerity for five to ten years would solve the economic problem, but it is unlikely that the political center could hold. Indeed, if the Chinese were to follow this course, they could do it only with massive political suppression at the same time.

The Party's Tangled Web

Therefore, one likely path is the reimposition of dictatorship, followed by whatever economic solutions the leadership might want to make. But there is a problem here: The interests of Party and People's Liberation Army leaders in Shanghai diverge from those of the central government. These leaders are deeply involved in the financial process of the coastal area, in bringing in foreign investment, in taking advantage of the nonmarket access to capital. They have no inclination to stop. Indeed, their wish is to see the irrational boom continue as long as possible.

There are splits in the interests of regional Party leaders, as well as a split between the regions and Beijing. The interests of coastal leaders lie not with Beijing so much as with Tokyo, New York and London. They have integrated themselves in the international financial system, and they are busy making plans for sustaining their regional enterprises in the event of a crisis. Meanwhile, Party leaders from the interior are demanding that these actions be stopped and that investment flow to their regions instead. Beijing is riding two horses that are running in very different directions.

Beijing well might fall off the horses. China has a history of cycling between a dictatorial system that closes it off from the world (a poor, but equal and stable China) and a system in which China is open to the world but torn apart from the inside out. Consider: Mao marched into the interior, raised a peasant army, came back and liquidated the internationalist bourgeoisie in 1948. He closed off the country and united it, throwing out the foreigners. Under the other model, preceding Mao, the country was open to foreigners, who tore it apart in regional conflicts while the interior starved.

The end result of China's economic crisis, therefore, will be a deep-seated political crisis. Only ever-increasing amounts of money have allowed China to maintain the current political alignment. Without that, it has two options. The first is a return to some sort of dictatorship from Beijing, under which economic problems would be dealt with inefficiently but unambiguously. The other is to accept a split between the coastal regions and the interior, the weakening of Beijing's authority and a period of instability and intense regionalism. It all depends on the political moves Beijing is making now, but our bet would be on the latter course. The instruments of power that Beijing has are too complicit in the financial crisis, and have too many diverging interests, to make the first option likely.

Geopolitics and Ripple Effects

Two possible geopolitical models emerge from this. Under one -- in its extreme form -- China returns to some sort of geopolitical Maoism. It encloses itself from the world, becomes increasingly bellicose but is limited by its own geography in what it can do. Under the other model, China slowly fragments and becomes a cockpit for the ambitions of foreign economic interests -- backed up by political and military power, with regional Chinese officials collaborating with foreigners to continue economic development. Oddly, the latter model would be more destabilizing to the world than the former, inasmuch as everyone will want to maintain their investments in China and expand them. In this scenario, China would again be a magnet for problems.

Mind you, these are not absolutes, but represent extremes on a continuum. There is surely a model under which Beijing would muddle through, as have the Japanese or Indonesians. No coherent strategy would emerge; it would all be tactical. It is difficult for us to see how this would not lead to regional destabilization, but then, China might be able to live with that. How it handles the unemployment and displaced peasant issue, however, is yet another question. This is a possible mid-point on the spectrum, but not in itself likely, it would seem.

As for the effects on the international economy, there has been a great deal of discussion about China's ownership of U.S. Treasury instruments and the consequences if that money were withdrawn in a crisis. In fact, this is the last thing that is going to happen. If China has a massive financial crisis, no one -- including the Chinese government -- is going to shift money from a safe haven into an uncertain cauldron. In crisis, the tendency would be a flight to safety. That means that rather than being pulled out, money would surge into the U.S. market -- legally and illegally, from the Chinese standpoint.

It is interesting to correlate the massive U.S. market surges that began in 1991, after the recession, and intensified dramatically in 1997 and 1998, with trends in Asia. In both cases, these surges followed major economic crises in rapidly expanding Asian economies. The events were, in our opinion, linked. The crisis in Japan in 1990 and 1991 led to major capital flight and helped to fuel the U.S. market rise. Similarly, the impending and expected East Asian meltdown in 1997 produced massive capital flight from Taiwan, South Korea and elsewhere to safer havens. A massive withdrawal from the U.S. market is the last thing to be expected.

What are in danger, of course, are foreign investments in China. There is the obvious financial issue: Many of these investments were not economically viable to begin with. But there is a political problem as well. The Party is going to have to blame someone for China's troubles, and it will not be the leadership. The obvious culprits will be corrupt officials and their paymasters in the international banking system. The truth or falsehood of the charge will matter little; corrupt officials and bankers already are being arrested, in the early stages of the crisis. As the situation intensifies, we would not be surprised to see foreigners investigated for corrupt practices as well.

But the bottom line is this: China has a history of nationalization and expropriation, and the party that enacted those measures is still in power. No one would have believed that the Party of Mao possibly could have become what it is today, but one should not assume that the evolution of the Chinese Communist Party is complete. Leaders could find that they have reason to re-enact some of Mao's own economic policies. We would be surprised to see a complete return to Maoism. We would not, however, be surprised to see the Party deliberately reverse some transactions that are no longer in its interests or (as and if things get more intense) take even more radical steps. It is still a Communist Party, it might be useful to recall.

Ultimately, the choice that China is now making is how quickly it will allow the consequences of its economic irrationality to unfold. The economic answer to the problem is to let shaky enterprises fall -- but the political cost of doing so will be too great, and a solution has already been long delayed. The longer an economic solution is delayed, the less one becomes possible and the more intense becomes Beijing's need to address the problem with political and security solutions. The more dependent the Chinese become on such measures, the more catastrophic will be the consequences if these solutions don't work.

China is long past the point of being able to solve the problem easily. The question is simply whether to buy time and pay in intensity, or force the crisis now. At some point, there no longer will be a choice. But the single most important thing to understand is that China does not really have an economic crisis any longer. The time for that has come and gone. There is now a political crisis at hand.

June 18, 2006

http://www.dailyexcelsior.com/web1/06june16/news.htm#2Excelsior Special Correspondent

JAMMU, June 15: Terming the Special Constitutional position a root cause of present crisis in Jammu and Kashmir State, the senior Bharatiya Janata Party (BJP) leader and former Union HRD Minister, Dr Murli Manohar Joshi today said that this was the reason that his Party is demanding the abrogation of Article 370.Addressing a gathering of BJP activists from Delhi, Madhya Pradesh (MP), Tamil Nadu, Jammu at Parade Ground here on the last day of nine day long Satyagraha today before courting arrest, Dr Joshi strongly opposed the demands of self-rule, greater autonomy and demilitarization in J&K emanating from different quarters.He said Indian Constitution should be uniformly applied to all States of the country and there should be no special position to any State or unit.Referring to present Kashmir problem and the increasing attacks on the innocent people in Doda and other parts of the State, the BJP stalwart termed it a part of conspiracy that Kashmir should not remain the Part of India. Without naming any country, he said some foreign countries also want that Kashmir should go to Pakistan to serve their interests which would not be allowed at any cost.He alleged that torching of religious places, temples and selective killings of Pandits in Valley led to cultural genocide in Valley, the example of which is not seen any where in the world. The BJP leader wanted to know what was the fault of Kashmiri Pandits? He said though our Party informed the then Prime Minister about the happenings in Kashmir but he paid no heed forcing the BJP to launch a movement at that time also.Now the same is being repeated in Doda to force the nationalist people to flee so that the designs of the country’s detractors are fulfilled. He however warned that their designs to separate Kashmir will not be allowed at any cost as entire country is with the people of J&K in their present struggle.Appreciating the people of Doda for displaying a brave front against the terrorism, he said despite facing all odds and attacks they sticked to their land. He assured them that entire nation will support them in this struggle.Expressing grave concern over the prevailing situation in the State, he alleged that Ladakh region is also facing a demographic change. Earlier this region had 60 percent population of Buddhists which has now been reduced to 40 percent , he alleged.While expressing concern over this trend he demanded that change of demography be stopped immediately in the State.Criticizing the Prime Minister for announcing the formation of working groups in the State during the last round table conference, the BJP leader asked why not a working group was framed on rehabilitation of Kashmiri Pandits. The jobs on which they were working in Kashmir have been filled up by their substitutes, their properties have been grabbed and when they demand their rights, the Government does not pay attention, he added.The BJP leader, while expressing his concern over the alleged discrimination being faced by Jammu and Ladakh regions, wanted to know what happened to billions of rupees given by India and where this money has gone. The Government should give account how much of this amount has been spent on Jammu and Ladakh.Later addressing a press conference here in the evening, Dr Joshi said that earlier BJP could not abrogate the Article 370 as Party was not enjoying full majority in the Parliament. He made it clear that if Congress brings a Bill in this regard BJP will blindly support it.He said the nationalists want unity of the country and the terrorists are hell bent to break it. He said the confused policies of it have emboldened the terrorists. "The State and Centre Governments should know that the terrorists want that nationalists should flee from the State so that they can achieve their designs of separating Kashmir from the country".He warned that in case the Government failed to crush the terrorism in J&K it will face same problem in other parts like North East, Bengal etc.He alleged that Prime Minister made no mention in his recent statement during roundtable to create the working groups on elimination of terrorism and solving the grievances Ladakhis.Dr Joshi made it clear that Pakistan was not a party to Kashmir issue and the only issue which is to be discussed with her is the closure of training camps on its soil and handing over of the PoK to India.He said how can the dialogue be held with Pakistan when it failed to stop cross border terrorism and there are evidence after evidence that to keep the promises made in this regard.On the opening of Poonch, Rawlakot road he said that any such thing which promotes terrorism should not be allowed to take place.Earlier, addressing the gathering BJP Deputy leader in Lok Sabha , Vijay Kumar Malhotra recalled the sacrifices given the Dogras for the integration of J&K State with India under the leadership of Pt. Prem Nath Dogra. He strongly opposed the demands of greater autonomy, demilitarization and self rule and demanded that Doda be handed over to Army, automatic weapons be given to VDC members and VDCs be strengthened.The other senior leaders who addressed the rally and Courted arrest include former MP Chief Minister Kailash Joshi, former Governor Kidar Nath Sawhney, Delhi State BJP chief, Dr Harsh Vardhan, Member Parliament, Narayan Singh Kesri, State BJP chief MP Satya Narayan Jatia , former Union Minister Bikram Verma, Mayors of Gwalior, Indore and Burhnpur, vice president BJP Tamil Nadu, Master Matan Ji, Virender Kumar, Ashok Aggarwal, Chater Singh Darakar, Ganesh Singh, Chanderban Singh, Laxman Singh, Mrs Maya Singh, Mrs Nita Pateria, Krishna Murari, Mogay Bikram Verma all MPs, ex MoS Defence Prof Chaman Lal Gupta, BJP State chief, Dr Nirmal Singh, Party vice president Prof. Hari Om, general secretaries,Bali Bhagat and Ashok Khajuria, Ex Governor, Babu Parmanand, district BJP, chief Shiv Kumar Gupta, Yudhvir Sethi, Sunil Dimple and all corporators.Earlier over 2000 Satyagrahis led by Dr Joshi took out a procession from Parade Ground and after passing through various bazars they courted arrest at Ranbireshwar Chowk.

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